STATE BANK OF INDIA.
SBI Debt-Equity ratio : 12.43 (march'12)
A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense.
If a lot of debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing.
The debt/equity ratio also depends on the industry in which the company operates. For example, capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2, while personal computer companies have a debt/equity of under 0.5.
ICICI BANK LTD.
ICICI Debt Equity ratio: 4.23 (march'12)
Which is the better bank?
As we said earlier, SBI's government backing makes it the more 'safer' entity. ICICI by itself does not have the reputation of good quality assets. But it is certainly striving to achieve the same. Both in terms of margins and returns, SBI has had an edge and will continue to have it in the medium term. Having said that investors must carefully weigh the future prospects of both the entities vis-a-vis their respective valuations before taking their pick.
DEBT INSTRUMENTS IN INDIA.
Debt Instruments are obligations of issuer of such instrument as regards certain future cash flow representing Interest & Principal, which the issuer would pay to the legal owner of the Instrument. They can also be said to be tradable...
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